MEASURING HEDGE EFFECTIVENESS FOR FAS 133 COMPLIANCE

Financial Accounting Standard (FAS) 133 requires business entities to document their anticipation of hedge effectiveness in order to qualify for hedge accounting treatment of gains and losses from financial derivatives. In the absence of specific guidelines, the accounting industry has espoused the "80–125" rule for determining hedge effectiveness. But the authors observe that meaningful assessment of anticipated hedge effectiveness must consider two distinct aspects of a firm's hedging strategy: (1) the strength of the hedging relationship, which is determined by the choice of the hedging instrument; and (2) the position taken in the hedging instrument relative to the holdings of the hedged item. They take both aspects of hedging into consideration in developing alternative measures of hedge effectiveness and distinguishing between the potential and attained effectiveness of a particular hedge. This approach enables the user to evaluate the relative merits of alternative hedging strategies to support risk management decisions, and also to document a selected hedging strategy's anticipated effectiveness for purposes of compliance with FAS 133. While the authors endorse a fairly broad interpretation of hedge effectiveness, their approach can also be used in the narrower context of an "80–125" rule.     

Noise Trading and the Management of Operational Risk; Firms,Traders and Irrationality in Financial Markets*

abstract Efficient market models cannot explain the high level of trading in financial markets in terms of asset portfolio adjustment. It is presumed that much of this excessive trading is irrational ‘noise’ trading. A corollary is that there must either be irrational traders in the market or rational traders with irrational aberrations. The paper reviews the various attempts to explain noise trading in the finance literature, concluding that the persistence of irrationality is not well explained. Data from a study of 118 traders in four large investment banks are presented to advance reasons why traders might seek to trade more frequently than financial models predict. The argument is advanced that trades do not simply occur in order to generate profit, but it does not follow that such trading is irrational. Trading may generate information, accelerate learning, create commitments and enhance social capital, all of which sustain traders' long term survival in the market. The paper treats noise trading as a form of operational risk facing firms operating in financial markets and discusses approaches to the management of such risk.     

First organise, then automate: a modern socio-technical view on ERP systems and teamworking

Previous empirical work demonstrated that self-managing teamwork and Enterprise Resource Planning (ERP) systems are difficult to combine in practice, and have called for the development of templates for configuring ERP systems to support teamworking. This requires a view on organisation design, dealing with both in an integrated fashion. 'Modern Socio-technology' provides such a view. We discuss its underlying principles and show how it relates to ERP.     

Satisfaction drivers for Internet service technology among stock brokerage customers in Thailand

Many financial services firms are offering the Internet as a self-service technology (SST), for online stock trading, in an effort to increase effciency and give customers greater access. It is important to understand how this technology will influence customer satisfaction. This paper reports results of exploratory research to identify sources of customer satisfaction and dissatisfaction with the service encounter in Thai stockbrokerage firms. Results show that customers and service providers determine sources of customer dis/satisfaction differently, depending on whether the service encounter is technology-based or interpersonal. Different customer profiles give rise to segmentation in response to the use of Internet technology in this industry.     

Duration and the price behavior of fixed-rate level payment mortgages: An analytical investigation

In this research we use a continuous payment formula for duration to examine the price behavior of a fixed-rate level payment mortgage. In the case where the mortgage is held to maturity, duration increases monotonically as term-to-maturity increases, regardless of changes in the market rate of interest. In the case where the mortgage is prepaid prior to maturity, there exists a unique market interest rate below which duration is a monotonically increasing function of time of prepayment, but above which duration has a global maximum at some time of prepayment prior to the term-to-maturity.     

Cultural influences on the design of incentive systems: The case of East Asia

Arguing that culture moderates the potency of various incentives in motivating employees, we propose a culture-contingent model of incentive system design in this article. Four nation-level determinants of culture are identified: historical events, economic/political structure, geographical location, and language characteristics. Based on evidence found in East Asia, specific propositions that either relate a national characteristic to some cultural attributes or predict how a cultural characteristic favours a particular type of incentive system are generated. The implications of this culture-contingent model for incentive system design in multinational firms are discussed.We would like to thank Donna Randall for her helpful comments on an earlier draft.     

Monetary policy regimes and beliefs*

This article investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic, stochastic general equilibrium model. In our model, monetary policy periodically switches between low and high money growth regimes. When individuals are unable to observe the regime directly, they form inferences over regime‐type based on historical money growth rates. For an empirically plausible money growth process, beliefs evolve slowly in the wake of a regime change. As a result, our model is able to capture some of the observed persistence of real and nominal variables following such a regime change.     

Fixed Exchange Rates and Disinflation in Emerging Markets: How Large Is the Effect?

We examine developing countries which have institutional quality ratings for the effects of exchange rate rigidity on inflation. The level of institutional development exerts no effect on the impact of currency regimes. However, the interaction of institutional quality and exchange rates has, in the most plausible specifications, a negative impact on inflation. This suggests that fixed exchange rates exert at most a contingent effect on inflation, and indicates that countries in Eastern Europe and Latin America contemplating currency pegs would be better off improving institutional quality prior to adopting the euro or dollar and expecting a large subsequent disinflationary effect. JEL no.  F31, O11     

Network neutrality and the nature of competition between network operators

The neutral architecture of the Internet is being challenged by various parties, such as network operators providing the connections to end-users, who are interested in gaining control of the information exchanged over the Internet. What are the effects on competition and welfare of such practices? Currently, there exists very little economic theory on network neutrality. This paper provides a preliminary analysis of the type of economic modeling that can address network neutrality, as well as of the type of results that can be expected.